Friday, March 25, 2011

Can 97% of the punters be right when they're all on one side of the same trade? Everyone agrees: the answer is "yes."

As I type this Thursday morning, the risk trade is merrily bubbling away: global equities are melting higher, along with gold/silver, oil, seaweed futures, 'roo bellies and everything else except the U.S. dollar, which is universally declared doomed.

Something about the complete correlation of all these markets and asset classes bothers me, as does the absolute consensus that the U.S. dollar has only one possible future: down.

There is only one object of scorn on the other side of this global trade: the universally hated and loathed U.S. dollar.

No wonder. Courtesy of the excellent Jesse's Cafe Americain, here is a long-term chart of the dollar. Yes, it is ugly, and yes, it looks to be on a downward path--except for that flag/wedge which has recently taken shape.

Put another way: there are no Bears left in any trade except for dollar Bears. Bears have been eradicated elsewhere. As a result, there is one guaranteed-to-win strategy:buy the dips on every risk trade.

My contrarian sensibility tingles when literally 97% of the punditry, advisors, and gurus are all confident about the same thing: that the dollar is doomed and gold/silver/equities/'roo bellies/uranium/bat guano, etc. are all "can't lose" propositions.

Yes, yes, oh yes I know that all fiat currencies go to zero, that all currencies are in a race to the bottom and that the dollar has already lost 96% of its pre-Federal Reserve purchasing power, so all we're really talking about is the last 4%--but still, it is striking that 97% of all the active punters, pundits and traders are dollar Bears.

Every once in awhile I skim the views of the various big-name financial pundits and gurus, and I have yet to find any who are making a contrarian bet here. They are all in lockstep, so much so they might as well be wearing cheesy bangled uniforms ("and this medal was for calling the Great Bull Market in 1982") and marching down Wall Street in formation.

Isn't it great when the future is this easy to predict? Who knew it would be this easy to mint billions in profits--and everyone can win by piling in on the same side of the trade. Just bet against the dollar and bet on permanent, raging inflation in tangibles and equities, it really doesn't matter: everything is going to the moon as the dollar inevitably plummets toward zero.

Garsh, I love it when there are no confusing feedbacks to worry about, or any pushback. All the pundits agree: buy gold, timber, emerging markets, private islands, gravel, bat guano--it doesn't matter, it's all going to skyrocket because there is one thing we all know for sure: the U.S. dollar is doomed and going to zero.

No feedback, no pushback, no unintended consequences--forget all that stuff, it's needless because this is so obvious.

Why am I reminded of the initial dot-bomb slide, when all the pundits and brokerage houses were recommending dot-coms at $40 per share, down from $80 and still "buys"? It was all so "can't lose." There was only one wee problem: everybody was on the same side of the boat.

You have to wonder what Jesse Livermore would be doing now that literally the entire investment world is on the same side of one global trade.

I don't usually consider myself easily shocked, but I have to confess the uniformity of conviction right now is breathtaking. Do all these players and pundits really believe the market will reward the 97% of the punters who have piled in on the same side of a trade?

This uniformity of conviction, this belief in an absolute ("real estate never goes down," "the dollar is doomed," etc.) marks the apex of investing bubbles and manias.

Hey, maybe everyone can pile into the same side of the same trade and keep logging fat gains; if so, then we can all become millionaires with incredible ease.

Maybe the dollar will track everyone's expectation to a T. Maybe there are no feedbacks, no pushback, no unexpected bumps in the One Big Trade. Maybe history has truly ended and the inevitable is now visible to all.

Maybe everybody can be right at the same time.

I find it peculiar that when people talk about the dollar's inevitable demise and the inevitability of hyper-inflation, they speak of the dollar not as a political construct governed by political decisions and political will, but as a Force of Nature, somewhat akin to a boulder rolling downhill. To question the dollar's demise is like expecting a giant thundering boulder to suddenly stop in mid-air as it tumbles down a mountainside: impossible.

Maybe it is all this easy and predictable, but my contrarian sense rebels at the current uniformity of conviction and the certainty that the future will track one easily predicted vector.

But I do have one tip: forget rare earth metals. The commodity that's about to take off is bat guano. I understand there's a leveraged ETF that's about to be released, and a bat guano futures market is about to open in Freedonia with 24/7 online trading. You can't miss, because everyone agrees.

Though it seems to have been forgotten, that's when things crash. When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It's ironic, isn't it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.

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